Parent PLUS Loan Program Contributes to Racial Wealth Inequality, Report Says

A federal student loan program used by many low-income African American families to finance their children’s postsecondary education is exacerbating wealth inequality in the U.S., according to a recent report released by the nonprofit think tank New America.

In The Wealth Gap PLUS Debt, Deputy Director for Research with the Education Policy Program at New America Rachel Fishman argues that the loan program Parent PLUS — which is critical for ensuring enrollment and revenue at historically black colleges and universities (HBCUs) — actually worsens the financial plight of families who struggle the most with student loan repayment. Designed largely for higher-income families, Parent PLUS has also been utilized by many low-income black families to gain access to higher education.

In 2011, the U.S. Department of Education established stricter guidelines for the disbursement of Parent PLUS loans by running tighter credit checks on applicants. As more and more parents were rejected, some colleges — especially those that enroll a large proportion of lower-income minority students, such as HBCUs — found themselves in a dire financial situation, with many parents unable to cover the cost of their children’s tuition.

“Reeling from such a dramatic loss in revenue, HBCU leaders and the Congressional Black Caucus demanded the change be reversed. As a result of their pressure, the Education Department rewrote the rules to make it easier for low-income parents with bad credit to borrow,” Fishman says in the report. “But none of those actions changed the dire underlying financial circumstances of low-income black families struggling to send their children to college.”

A recent analysis of Education Department data indicates how precarious Parent PLUS loans are for low-income families. According to Fishman, it points to “federal student loan policies [that] are driving an intergenerational accumulation of debt that burden the neediest families.”

She argues that African American families have seen their wealth slip away due to years of discriminatory practices and policies — partially caused by predatory lending practices — that have prevented them from building up property equity. At the same time, regulations that bolster wealth accumulation for white families have allowed them to pass that wealth on to their children — for example, by assisting them with buying a house or funding their education.

The Parent PLUS program, Fishman says, “exacerbates the racial wealth divide by promoting debt among low-income black families” who, data suggest, struggle to repay these loans.

The report makes several stopgap policy recommendations including adding a measure to the Parent PLUS loan credit check that ensures parents’ ability to repay and prohibiting colleges from packaging the loans with a student’s financial aid award letter. To ensure real change over the long term, however, Fishman advocates for improved aid for minority and low-income students to help them fund their college education without amassing crippling debt.